Income Computation and Disclosure Standards and …jbnagarca.org/wp-content/uploads/2012/06/15-Oct-2017...6 Generalprinciples: ICDS apply only to computation of: — Profits and gains

Income Computation and Disclosure Standards and Tax Audit

CA N.C. HegdeJ B Nagar CPE Study Circle –15th October 2017

An Overview

Background:

History:-

January 1996:CBDT notified AS I & II

July 2014:section 145 was amended to substitute ICDS for AS

March 2015:10 ICDS were notified

September 2016:Revised ICDS were issued & Form 3CDwas amended to capture compliance

March 2017:CBDT issued Circular No.10/2017 dated 23 March 2017 providing clarifications on specific issues (FAQ)

Enabling Provisions:-

section 145(1):‘Profits & gains of business or profession’ or ‘Income from other sources’ shall subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee

section 145(2):The Central Government may notify ICDS for any class of assessees or for any class of income

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Revised ICDS applicable from AY 2017-18:

ICDS Corresponding AS Corresponding Ind-AS

I - Accounting Policies AS-1 Ind AS-8

II - Valuation of Inventories AS–2 Ind AS-2

III - Construction Contracts AS–7 Ind AS-115

IV - Revenue Recognition AS–9 Ind AS-115

V - Tangible Fixed Assets AS-10 Ind AS-16

VI - Effects of Changes in ForeignExchange Rates

AS–11 Ind AS-21

VII - Government Grants AS–12 Ind AS-20

VIII – Securities AS–13/AS–30 Ind AS-109

IX - Borrowing Costs AS–16 Ind AS-23

X - Provisions, Contingent Liabilities & Contingent Assets

AS–29 Ind AS-37

Draft ICDS on Real Estate Transactions (CBDT press release dt. 11 May 2017)

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Applicability:

Applies to all assessees following the mercantile system of accounting, except for individuals, HUF who are not

covered under the tax audit provisions

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Circular No. 10/2017 dated 23 March 2017 clarifies that ICDS will apply to:-

Assessees under presumptive tax schemes – FAQ 3 Companies adopting Ind-AS – FAQ 5 AMT computation, but will not apply to MAT computation – FAQ 6 Assessees in Finance, Insurance & Power sectors – FAQ 7 Real estate developers, Build-Operate-Transfer projects, Leases – FAQ 12

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General principles:

ICDS apply only to computation of:— Profits and gains of business or profession— Income from other sources

ICDS do not apply to maintenance of books of account – FAQ 1

In case of conflict, the provisions of the Act shall prevail - Preamble

Specific provisions of the Rules shall prevail over ICDS – FAQ 14

W.e.f. AY 2017-18, ICDS shall prevail over judicial precedents – FAQ 2

Disclosures required under ICDS are to be made in the ITR Form and Form 3CD – FAQ 25

Default in compliance with ICDS may lead to best judgment assessment– section 145(3)

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Disclosures - Form 3CD (1/2):

Clause 13(d) under Part-B:

(d) Whether any adjustment is required to be made to the profits or loss forcomplying with the provisions of income computation and disclosure standardsnotified under section 145(2)

(e) If answer to (d) above is in the affirmative, give details of such adjustments:

Increase in profit (Rs.)

Decrease in profit (Rs.)

Net effect (Rs.)

ICDS I Accounting Policies

ICDS II Valuation of Inventories

ICDS III Construction Contracts

ICDS IV Revenue Recognition

ICDS V Tangible Fixed Assets

ICDS VI Changes in Foreign Exchange rates

ICDS VII Government Grants

ICDS VIII Securities

ICDS IX Borrowing Costs

ICDS X Provisions, Contingent Liabilities and Contingent Assets

Total

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Disclosures - Form 3CD (2/2):

Clause 13(d) under Part-B (Contd..):

(f) Disclosure as per ICDS:

(i) ICDS I - Accounting Policies

(ii)ICDS II - Valuation of Inventories

(iii)ICDS III - Construction Contracts

(iv)ICDS IV - Revenue Recognition

(v)ICDS V - Tangible Fixed Assets

(vi)ICDS VII - Government Grants

(vii)ICDS IX - Borrowing Costs

(viii)ICDS X - Provisions, Contingent Liabilities and Contingent Assets

Disclosures - Forms ITR 3, ITR 5, ITR 6 (1/2):

Schedule ICDS:

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Disclosures - Forms ITR 3, ITR 5, ITR 6 (2/2):

Part A - OI:

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Some Issues & Observations:

ICDS are contrary to the law settled by judicial precedents eg: recognition ofretention money

Though the ICDS do not apply to maintenance of books, the differences intreatment in books & as prescribed under ICDS, may necessitate maintenanceof records & workings to prove adjustments eg: difference in the provisionamount as per books and as claimed for tax purpose due to differentrecognition criteria under Ind-AS 37 and ICDS X

Potential double taxation due to accelerated income recognition under ICDSi.e. normal tax in the year of income recognition as per ICDS and MAT in theyear of accounting in books.

ICDS I – Accounting Policies

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Highlights:

The ICDS is based on the fundamental accounting assumptions of GoingConcern, Consistency & Accrual

Accounting policies shall represent a true and fair view of the state of affairs and income of the business, profession:

– Treatment & presentation of transactions to be governed by substance &not merely the legal form

– MTM loss or an expected loss shall not be recognized unless permitted by any other ICDS (eg: inventory valuation loss, forex loss on monetary item)

MTM gain or expected profit shall not be recognized unless permitted by any other ICDS – FAQ 8 of Circular No. 10/2017

An accounting policy shall not be changed without reasonable cause

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Disclosures:

All significant accounting policies adopted by the tax payer

Any change in an accounting policy which has a material effect along with theamount by which any item is affected. Where such amount is notascertainable, wholly or in part, the fact shall be indicated

Any change in accounting policy which has no material effect for the currentyear but is reasonably expected to have a material effect in later years, thefact of such change shall be appropriately disclosed in the year of change andalso in the year in which the change has material effect for the first time

If any fundamental accounting assumption is not followed, the fact shall bedisclosed

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Reasonable cause for change in accounting policy:

: Under the Act, 'reasonable cause' is an existing concept and has evolved wellover a period of time conferring desired flexibility to the tax-payer indeserving cases - FAQ 9 of Circular No. 10/2017

Reasonable cause can be reasonably said to be a cause which prevents a manof average intelligence and ordinary prudence, acting under normalcircumstances without negligence, inaction or want of bonafide – AzadiBachao Andolan[2001]](252 ITR 471)(Del)

Assessee can change accounting policy if the same is bona fide and isfollowed in subsequent years as well - Atul Products Ltd. [2002](255 ITR85)(Guj), Mopeds (India)[1988](173 ITR 347)

Earlier, under AS, a change in accounting policy was permitted only if required by statute; or for compliance with AS; or if considered as resulting in more appropriate presentation

ICDS II – Valuation of Inventories

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Highlights:

Inventories shall be valued at cost or net realizable value, whichever is lower

Identified valuation methods – First-in First-out, Weighted average cost, Retail method, Standard costing

Specific identification of cost is required for goods that are not ordinarily interchangeable and produced & segregated for specific projects

Valuation method once adopted not to be changed without a reasonable cause

Inventory shall be valued at NRV on the date of dissolution of partnership firm/ AOP/ BOI, whether business is discontinued or not

Value of opening inventory to be the same as the closing inventory in the preceding year– regardless of change in valuation method of closing inventory

Disclosures: The accounting policies adopted in measuring inventories including the cost

formulae; a confirmation that standard cost approximates the actual cost

The total carrying amount of inventories and its classification appropriate to aperson

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Valuation on dissolution of firm, AOP, BOI:

On dissolution of firm, AOP or BOI, inventory to be valued at NRV regardless of whether business is discontinued:

– Negates the ruling in Sakthi Trading Co [2001](250 ITR 871)(SC) wherein SC upheld lower of cost or NRV considering that business was continued post dissolution

– In A.L.A Firm[1991](189 ITR 285)(SC), SC upheld valuation at NRV since business was discontinued on dissolution

ICDS III – Construction Contracts

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Highlights:

Recognition of revenue (including retentions) & costs (direct costs, allocatedcosts, borrowing costs & other costs specifically chargeable to customer) shallbe based on the percentage of completion method (POCM)

Contract revenue shall be recognized when there is reasonable certainty of its ultimate collection

Contract costs to be reduced by incidental income if not in the nature of interest, dividends or capital gains

During the early stage (not extending beyond 25% of the completion stage),contract revenue must be recognized only to the extent of costs incurred

Disclosures: The amount of contract revenue recognized as revenue in the period

The methods used to determine the completion stage of contracts in progress

For contracts in progress at the reporting date, following to be disclosed:-

– amount of costs incurred and recognized profits (less recognized losses)– the amount of advances received– the amount of retentions

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Recognition of retention money:

Various Courts have held as under:– The assessee does not have the right to receive the entire amount including the retention

amount, on the date of submission of bills – Simplex Concrete Piles India (P) Ltd[1989](179 ITR 8)(Cal), East Coast Constructions & Ind Ltd [2007](283 ITR 297)(Mad)

– The retention amount will accrue upon completion of work – Ballast Nedam International[2013](215 Taxman 254), Ignifluid Boilers (India)Ltd [2006](283 ITR 295)(Mad),Associated Cables Ltd [2006](286 ITR 596)(Bom)

– The right to receive retention amount does not accrue till the performance warrantyperiod is over – Amarshiv Construction (P) Ltd [2014](367 ITR 659)(Guj)

It can hence be argued that the retention amount does not accrue until the work is completed or the terms and conditions under the contract are satisfied

The ICDS however accelerates recognition of retention money as contract revenue subject to reasonable certainty of its ultimate collection

Can the ICDS override the ‘accrual’ principle under section 5 r.w.s 9, given that in case of conflict, the provisions of the Act shall prevail?

ICDS IV – Revenue recognition

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Highlights - Recognition of revenue:

Sale of goods

Upon transfer of significant risks & rewards of ownership to buyer

Recognition only if there is reasonable certainty of ultimate collection

Claims for price escalation & export incentives can be postponed to the extent of uncertainty of collection

Rendering of services

Service contracts with duration < 90 days: When the rendering of services is completed or substantially completed

Services involving an indeterminate number of acts over a specific period: On a straight line basis over such period

Other service transactions: By the POCM - requirements of ICDS III shall mutatis mutandis apply

Interest, Royalties,Dividends

Interest: On time basis

Interest on refund of any tax, duty or cess: On receipt basis

Discount or premium on debt securities held: Over the period to maturity

Royalty: As per terms of the relevant agreement, unless based on substance, some other systematic and rational basis is more appropriate

Dividends: In accordance with the Act

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Disclosures:

For sale of goods:Amount of unrecognized revenue during the previous year due to lack ofreasonably certainty of its ultimate collection along with nature ofuncertainty

For service transactions:— Amount recognized as revenue during the previous year

— The method used to determine the stage of completion of servicetransactions in progress

— For service transactions in progress at the end of previous year:(i) amount of costs incurred and recognized profits (less recognized

losses) upto end of previous year;(ii)the amount of advances received; and (iii). the amount of retentions

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Specific clarifications - Circular No. 10/2017 dt. 23 March 2017:

Issue Clarification

FAQ 13 - The condition of reasonablecertainty of ultimate collection is notlaid down for taxation of interest,royalty and dividend. Whether thetaxpayer is obliged to account for suchincome even when the collectionthereof is uncertain?

As a principle, interest accrues ontime basis and royalty accrues on thebasis of contractual terms.Subsequent non-recovery in eithercases can be claimed as deduction inview of amendment to section36(1)(vii). Further, the provision of theAct (e.g. Section 43D) shall prevailover the provisions of ICDS

FAQ 14 - Whether ICDS is applicableto revenues which are liable to tax ongross basis like interest, royalty andFTS for non-residents u/s 115A of theAct?

The provisions of ICDS shall also applyfor computation of these incomes ongross basis for arriving at the amountchargeable to tax

ICDS V – Tangible Fixed Assets

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Highlights:

Tangible fixed asset shall be recorded at actual cost including purchase price,taxes (excluding those that are recoverable) and other expenditure forbringing the asset to workable condition

Administration & general overheads to be excluded if not relating to asset

Expenditure on start-up and commissioning of a project shall be capitalized;expenditure post commencement of commercial production shall be expensed

Expenditure incurred after trial run but before commencement of commercialproduction shall be capitalized - FAQ 15 of Circular No. 10/2017

Fair value to be recorded if asset is acquired for non-monetary consideration.Consolidated price for acquiring group of assets to be apportioned on fairbasis

Depreciation and income on transfer of asset will be as per the Act

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Disclosures:

Description of asset or block of assets

Rate of depreciation

Actual cost or written down value, as the case may be

Additions or deductions during the year with dates; in the case of any addition of asset, date put to use; including adjustments on account of—– Central Value Added Tax credit claimed and allowed under the CENVAT Credit

Rules, 2004– Change in rate of exchange of currency– Subsidy or grant or reimbursement, by whatever name called

Depreciation allowable

Written down value at the end of year

ICDS VI – Effects of Changes in Foreign Exchange Rates

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Highlights (1/2):

Foreign currency transactions shall be recorded initially at exchange rate ason the date of transaction or at a weekly / monthly average rate (if such ratedoes not fluctuate significantly from the actual rate)

Rates to be applied for year-end conversion:-– Monetary items – closing rate unless it does not reflect the amount likely to

be realized or required for disbursal– Non-monetary items - exchange rate at the date of the transaction– Inventory carried at NRV – exchange rate when NRV was determined

Exchange difference on monetary items (and not non-monetary items) ateach year-end shall be recognized as income / expense

The above is made subject to section 43A and rule 115 of the Act

Financial statements of a foreign operation shall be translated as above

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Highlights (2/2):

Premium / discount on certain forward exchange contracts shall be amortizedover the life of the contract and exchange differences / differences on renewalor cancellation will be recognized as income / expense

Premium / discount / exchange difference on contracts that are intended fortrading or speculation purposes, or that are entered into to hedge the foreigncurrency risk of a firm commitment or a highly probable forecast transactionshould be recognized at the time of settlement

ICDS-I would apply to derivative instruments not within the scope of ICDS –VI - FAQ 10 of Circular No. 10/2017– eg: cross currency swaps, futures, interest rate swaps, etc.

ICDS VII – Government Grants

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Highlights:

Government grants shall be recognized when there is reasonable assurancethat related conditions will be complied with & ultimate collection will be made- recognition cannot be postponed beyond the date of actual receipt

Grants relating to depreciable asset must be reduced from actual cost orwritten down value. Grants received for a group of assets will be apportioned

Grants for compensation of expense / loss or for giving immediate financialsupport with no further related costs will be recognized as income in the yearin which it is receivable

Grants relating to non-depreciable assets and other grants will be recognizedas income over the period over which related cost is charged to income

Grants in the form of non-monetary assets, given at a concessional rate, shallbe accounted for on the basis of their acquisition cost

Refund of grants shall be applied first against any unamortized deferredcredit, charged to P&L or added to the cost/WDV of the depreciable asset

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Disclosures:

Nature & extent of Grants recognized during the year by way of deductionfrom the actual cost of assets or from the WDV of block of assets

Nature & extent of Grants recognized during the year as income

Nature & extent of Grants not recognized during the year by way ofdeduction from the actual cost of assets or from the WDV of block of assets& the reasons thereof

Nature & extent of Grants not recognized during the year as income & the reasons thereof

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Grants no longer a capital receipt?

Subsidy/ Grants held as non-taxable:-– Subsidy granted for setting up new unit/expansion of existing business is a capital

receipt – Ponni Sugars & Chemicals Ltd.[2008](306 ITR 392)(SC)– Subsidy to setup a new unit in a backward area- Reliance Industries Ltd.[2011](339

ITR 632)(Bom)– Incentive of additional quota for free sale of sugar for setting up a new sugar

factory/expansion – Kisan Sahkari Chini Mills Ltd.[2010](2 taxmann.com 274)(All)– Grant for R&D in the field of telecommunications, which would benefit the Nation &

public at large - India Telephone Industries Ltd [2013](215 Taxman 82)(Kar)

Amendment to section 2(24) by the Finance Act, 2015 read with the Finance Act, 2016:(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawbackor waiver or concession or reimbursement (by whatever name called) by the CentralGovernment or a State Government or any authority or body or agency in cash orkind to the assessee [other than,—(a)the subsidy or grant or reimbursement which is taken into account for

determination of the actual cost of the asset in accordance with the provisions ofExplanation 10 to clause (1) of section 43; or

(b)the subsidy or grant by the Central Government for the purpose of the corpus of atrust or institution established by the Central Government or a State Government,as the case may be];]

Carbon credit, Prepayment of sales tax deferral loan – Not covered by the ICDS/ above amendment?

ICDS VIII – Securities

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Scope:

institutions are covered

Deals with:Part A – Securities held as stock-in-tradePart B - Securities held by scheduled banks or public financial institutions

Part A: “securities" mean securities as per section 2(h) of the Securities Contracts(Regulation) Act, 1956 (excluding derivatives referred to in sub-clause (ia) of thatdefinition) and include share of a company in which public are not substantially interested

Part B: “securities" mean securities as per section 2(h) of the Securities Contracts(Regulation) Act, 1956 and include share of a company in which public are notsubstantially interested

As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956, “securities” include—(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like

nature in or of any incorporated company or other body corporate;(ia) derivative;(ib) units or any other instrument issued by any collective investment scheme to the investors in such

schemes;(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002;(id)units or any other such instrument issued to the investors under any mutual fund scheme;(ii) Government securities;(iia)such other instruments as may be declared by the Central Government to be securities; and(iii) rights or interest in securities;

Similar definition under both Parts, except that only derivatives held by scheduled banks & public financial

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Highlights:

Part A securities:• An acquired security shall be recognized at ‘actual cost’

• Actual cost means:– Purchase price + Acquisition charges (brokerage, fees, tax, duty, cess)– Fair value of the acquired security, where the security is acquired in exchange for

other securities or another asset

• Pre-acquisition period interest included in the purchase price, shall be reducedfrom the actual cost on subsequent receipt

• Closing year-end value = Lower of actual cost initially recognized or NRV

• Comparison shall be done category wise and not for each individual security. Securities shall be classified into Shares, Debt securities, Convertible securities, Any other securities

• In the case of unlisted securities or thinly-traded securities, the initiallyrecognized actual cost shall be the Closing value

• if actual cost cannot be ascertained by specific identification, the same shall bedetermined as per FIFO method or weighted average cost formula

Part B securities:• The extant RBI guidelines in this regard shall apply and any claim for

deduction in excess of the said guidelines shall not be taken into account

Specific clarifications - Circular No. 10/2017 dt. 23 March 2017:

Issue Clarification

FAQ 18 - A taxpayer sells a security on30 April 2017. The interest paymentdates are December and June. Theactual date of receipt of interest is 30June 2017 but the interest on accrualbasis has been accounted as incomeon 31 March 2017. Whether thetaxpayer shall be permitted to claimdeduction of such interest i.e. offeredto tax but not received whilecomputing the capital gain?

Yes, the amount already taxed asinterest income on accrual basis shallbe taken into account for computationof income arising from such sale

The clarification provides relief in a scenario where the security is sold after interest recognition on time basis as per ICDS IV, but before interest receipt

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Specific clarifications - Circular No. 10/2017 dt. 23 March 2017:

Issue Clarification

FAQ 19 - Para 9 of ICDS-VIII requiressecurities held as stock-in-trade to bevalued at actual cost initiallyrecognized or net realizable value(NRV) at the end of that previousyear, whichever is lower. Para 10 ofPart-A of ICDS-VIII requires the saidexercise to be carried out categorywise. How the same shall becomputed?

For subsequent measurement ofsecurities held as stock-in-trade, thesecurities are first aggregatedcategory wise. The aggregate cost andNRV of each category of security arecompared and the lower of the two isto be taken as carrying value as perICDS-VIII. Refer Illustration (onsubsequent slide)

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FAQ 19 – Category-wise valuation - Illustration:

Security Category Cost NRV Lower of cost or NRV

ICDS value

A Share 100 75 75

B Share 120 150 120

C Share 140 120 120

D Share 200 190 190

Total 560 535 505 535

E Debt Security 150 160 150

F Debt Security 105 90 90

G Debt Security 125 135 125

H Debt Security 220 230 220

Total 600 615 585 600

Securities Total 1160 1150 1090 1135

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When do securities constitute Stock-in-trade?

Part-A of the ICDS deals with securities held as stock-in-trade. However, theICDS does not guide on when securities can be considered as stock-in-trade

Litigation around the same continues and reliance would have to be placed on judicial precedents & CBDT Circulars

Category-wise valuation of securities:

As may be noted from the illustration provided in the FAQ, the ICDS valuebased on category-wise valuation is INR 1135 as against INR 1090 which isthe lower of the cost/ NRV of the individual securities

Thus under category-wise valuation, anticipated profits are indirectlyrecognized and brought to tax, since appreciation in the value of certainsecurities is off set against the diminution in the value of other securities

Potential double taxation i.e. normal tax in a year based on ICDS value andMAT in another year based on book value

ICDS IX – Borrowing Costs

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Highlights:

Borrowing costs (including interest, commitment charges, premium, etc.) thatare directly attributable to the acquisition, construction or production of aqualifying asset shall be capitalised as part of the cost of the asset

Qualifying asset means:−– Land, building, machinery, plant or furniture, being tangible assets– Know-how, patents, copyrights, trade marks, licences, franchises or any

other business or commercial rights of similar nature, being intangibleassets

– Inventories that require a period of twelve months or more to bring them toa saleable condition

Borrowing costs to be considered for capitalization shall exclude costs whichare disallowed under specific provisions of the Act - FAQ 20 of Circular No.10/2017

Bill discounting charges and other similar charges are covered as borrowingcost - FAQ 21 of Circular No. 10/2017

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Capitalization of borrowing costs:

Specific Borrowing General Borrowing

Amount to be capitalized

Actual To be computed as per specified formula(the qualifying asset shall be such asset that necessarily requires a period of 12 months or more for its acquisition, construction or production)

Commencement of capitalization

From the date on which funds are borrowed

From the date on which funds are utilized

Cessation of capitalization

When the asset is first put to use(In case of inventory – when substantially all the activities necessary to prepare it for its intended sale are complete)

The ICDS aligns with the amended section 36(1)(iii) of the Act

acquisition, construction or production.46

Formula for capitalization of General Borrowing cost:"6. Subject to Para 8, in respect of borrowing other than those referred to inPara 5, if any, the amount of borrowing costs to be capitalised shall be computedin accordance with the following formula namely :—

A x B/CA = borrowing costs incurred during the previous year except on borrowingsreferred to in Para 5 above;

B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the previous year;(ii)in case the qualifying asset does not appear in the balance sheet of a person on the first day, half of the cost of qualifying asset; or(iii)in case the qualifying asset does not appear in the balance sheet of a person on the last day of the previous year, the average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year and on the date of put to use or completion, as the case may be, excluding the extent to which the qualifying assets are directly funded out of specific borrowings;

C = the average of the amount of total assets as appearing in the balance sheet of a person on the first day and the last day of the previous year, other than assets to the extent they are directly funded out of specific borrowings;

Explanation — For the purpose of this paragraph, a qualifying asset shall be such asset that necessarily require a period of twelve months or more for its

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Disclosures:

The accounting policy adopted for borrowing costs The amount of borrowing costs capitalised during the year

ICDS X – Provisions, Contingent Liabilities and Contingent Assets

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Highlights:

Deals with provisions, contingent liabilities and contingent assets, exceptthose resulting from financial instruments, executory contracts, arising ininsurance business or covered by other ICDS

ICDS does not address provisions for depreciation, impairment of assets anddoubtful debts which are adjustments to the carrying amounts of assets

Recognition:

Provisions • To be recognized when there is reasonably certainty that an outflow of resources embodying economic benefits will be required to settle a present obligation arising out of a past event

• Costs relating to future obligations or future operations are not to be recognized

• Obligation under a proposed new law arises only when such law is enacted

Contingent Liabilities

• Shall not be recognized

Contingent Assets

• To be recognized as income if inflow of economic benefit or reimbursement is ‘reasonably certain’

Highlights:

The amount recognized shall not be discounted to its present value

The amount recognized shall be reviewed at each year-end and adjusted toreflect the current best estimate. The amount shall be reversed if it no longermeets the recognition criteria

Disclosures:For each class of provision

• A brief description of the nature of the obligation• The carrying amount at the beginning & end of the year• Additional provisions made during the year, including increases to

existing provisions• Amounts used, that is incurred and charged against the

provision, during the year• Unused amounts reversed during the year• The amount of any expected reimbursement, stating the amount

of any asset that has been recognized for that expected reimbursement

For each class of asset & related income

• A brief description of the nature of the asset and related income• The carrying amount of asset at the beginning and end of the

year• Additional amount of asset and related income recognized during

the year, including increases to assets and related income already recognized

• Amount of asset and related income reversed during the year50

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Loss on onerous executory contracts:

onerous contracts, are Unlike AS 29, all executory contracts includingoutside the scope of ICDS X

Based on commercial accounting principle, it may be argued that provision for loss on onerous contracts is deductible

Recognition of Contingent Asset:

As against the ‘reasonable certainty’ recognition criteria under ICDS X, AS29 prescribes recognition based on ‘virtual certainty’ of inflow of economicbenefits

Tax authorities may argue that ‘reasonably certain’ is a lower threshold than ‘virtually certain’

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Potential double taxation in some scenarios:

: In contrast to the ‘reasonable certainty’ recognition requirement of ICDS X, AS 29 prescribes recognition of provision based on ‘probability’ of outflow of resources

Consider the following scenario:

Year 1 – Book Profit

Revenue 100

Less: Provision (based on Probability)

(40)

Net Profit 60

Year 2 – Book Profit

Revenue 200

Less: Cost incurred &adjusted against provision

NIL

Net Profit 200

Year 1 – Taxable Income as per ICDS

Revenue 100

Less: Provision (based on Reasonable Certainty)

NIL

Net Profit 100

Year 2 – Taxable Income as per ICDS

Revenue 200

Less: Cost incurred &adjusted against provision

(40)

Net Profit 160

Year 1 - Tax is payable on the income of Rs.100 as per ICDS Year 2 - MAT is payable on the Book Profit of Rs.200

The Provision of Rs.40 is hence doubly taxed

Recent Development

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Writ Petition challenging the constitutional validity of ICDS:Key Grounds: The ICDS are contrary to settled law as laid in various judicial precedents

The Central Government (through CBDT), who notified ICDS, in exercise ofdelegated legislation, cannot have such uncontrolled, unfettered or absolutepowers while prescribing ICDS, so as to nullify the effect of various SupremeCourt / High Court judgments

The Central Government’s further sub-delegating its authority to notify theICDS to CBDT, is erroneous as this is against the principle of ‘delegatapotestasnon potestdelegari’, meaning “no delegated powers can be further delegated”

There is violation of Articles 14, 19(1)(g), 141, 144 & 265 of the Constitution

Compliance with ICDS is an arbitrary, unnecessary & unreasonable additionalrequirement, which will increase the compliance burden & cost in the hands ofthe taxpayers and would thus defeat the purpose of the ICDS in terms ofsimplification of processes

Assessees across the country will have to spend considerable amount of time,energy & man hours in preparing & reconciling income as per ICDS and as perbooks of accounts maintained as per applicable AS

Listed for hearing in October 2017

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Abbreviations:

AMT Alternate Minimum TaxAOP Association of PersonsAS Accounting StandardsAY Assessment YearBOI Body of IndividualsCBDT Central Board of Direct TaxesCG Central GovernmentDTAA Double Taxation Avoidance AgreementFAQ Frequently Asked QuestionFMV Fair Market ValueFTS Fees for technical servicesFY Financial YearHUF Hindu Undivided FamilyICAI The Institute of Chartered Accountants of IndiaICDS Income Computation and Disclosure StandardInd-AS Indian Accounting StandardsINR Indian RupeesITA/ the Act Income-tax Act, 1961 ITR/ the Rules Income-tax Rules, 1962 ITR Income-tax Return FormMAT Minimum Alternate TaxMCA Ministry of Corporate AffairsMTM Market to MarketP&L Profit & Loss AccountRBI Reserve Bank of IndiaTDS Tax Deducted at Sourcer.w.s. Read with sectionu/s Under sectionw.e.f. With effect from

Thank You